The latest US inflation data is set to be released this Thursday at 12:30 GMT, with expectations pointing towards a further decline in the headline Consumer Price Index (CPI) for the month of June. This decrease in the CPI comes at a time when the labor market is also displaying signs of a slowdown, with the unemployment rate ticking up to 4.1% and annual wage growth easing to just below 4.0%.

The Federal Reserve (Fed) has been closely monitoring these developments, as they try to determine whether it’s time to adjust their monetary policy. Fed Chair Jerome Powell is scheduled to testify before Congress on Tuesday at 14:00 GMT, providing further insights into the central bank’s thinking.

While inflationary pressures have been receding and the labor market is cooling off, the Fed is still not fully convinced that it’s time to make a significant policy shift. The headline CPI rate is expected to moderate from 3.3% to 3.1% year-on-year in June, but the core CPI rate is forecast to remain unchanged at 3.4%.

One key factor that the Fed will be keeping a close eye on is services inflation, particularly a core measure that excludes shelter costs. This measure has been accelerating throughout the year, reaching 5.0% year-on-year in May. The Fed would prefer to see this metric trend lower for a sustained period before considering any major policy changes.

Despite the anticipated decline in various CPI metrics for June, it may not be sufficient to prompt the Fed to signal an interest rate cut just yet. The July meeting is unlikely to see any policy shifts, but September could be a different story. With two more CPI and Personal Consumption Expenditures (PCE) inflation reports scheduled before the September Federal Open Market Committee (FOMC) meeting, there is still time for the pieces to fall into place.

Market participants will be closely watching Powell’s testimony this week for any hints on the Fed’s stance towards a potential rate cut. If Powell provides clues about a swift policy response to a weakening job market, the US dollar could face renewed pressure. On the other hand, if Powell remains cautious or if there are upside surprises in the CPI readings, the dollar could regain strength.

Overall, the US economy appears to be losing momentum, increasing the likelihood of a rate cut in September. However, uncertainties such as the upcoming presidential election could limit the downside for Treasury yields and impact the Fed’s decision-making process. As the situation continues to evolve, investors will be monitoring economic data releases and Fed statements for further guidance on the future direction of monetary policy.